Tax Administration

Compared to the 1960s and 1970s, the audit rate--the annual percentage of individual tax returns that the Internal Revenue Service (IRS) has audited of the total number of tax returns filed--has dropped, falling below one percent in fiscal year 1993. Although IRS believes that its audits promote voluntary taxpayer compliance, no one knows their actual impact, particularly in light of a decreasing audit rate. Data are available, however, on trends in audit rates across the country and on the results of these audits, such as the type of tax returns being audited and the productivity of the audits, measured by additional taxes recommended per return and per direct audit hour. This report discusses (1) the trend in IRS' audit rates for individual returns and (2) the overall results of IRS' most recent audits of individual returns.

GAO found that: (1) while the audit rate for individuals decreased between fiscal years (FY) 1988 and 1993 from 1.57 percent to .92 percent, it increased to 1.67 percent by FY 1995; (2) between FY 1992 and FY 1994, the number of audited computer-selected returns and returns with potential tax shelters declined by half, while the number of audited returns with potential nonfilers and returns with unallowable items tripled; (3) audit rates varied by region and district office; (4) between FY 1988 and FY 1995, audit rates were highest in the western region of the country and lowest in the central United States; (5) between FY 1988 and FY 1995, audit rates increased among those in the lowest-income group and decreased among those in the highest-income group; (6) audits of the highest-income group yielded the most recommended additional tax per return; and (7) between FY 1992 and 1994, additional taxes recommended for each direct audit hour increased for business individuals in the lowest and highest-income groups and nonbusiness individuals in the lowest-income group, and decreased for nonbusiness individuals in the highest-income group.